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Can ‘Made in Nigeria’ be financed by foreign investors?

Funmi Adebayo
By Funmi Adebayo

Funmi is a banker and financial analyst based in London

Posted on Thursday, 1 March 2018 20:33, updated on Wednesday, 20 March 2019 11:49

As long as postal delivery remains scanty, local textile dealers such as this one in Kano need not worry about Jumia's IPO. Ben Curtis/AP/SIPA

President Muhammadu Buhari made it clear when he came into office: "We will no longer allow our markets to be flooded with things we can produce ourselves. We must believe in our system. Whenever you need my intervention at any time, please come to me."

Manufacturing and industrialisation were to be the bedrock of the country’s resurgence. Buhari went on to talk about improving infrastructure and encouraging entrepreneurship. That triggered Twitter-influenced movements such as #BuyNaijaToGrowTheNaira and #BuyNigerian. There was a feeling that Nigerians, led by the stern-faced President Buhari, could return to yesteryear: a strong naira, self-reliance and self-respect.

Fast-forward to today and the President of #MadeInNigeria has become the President of #FinanceInDollars. That strong naira? We would prefer to borrow in foreign money, please, is the message from Abuja.

How the government handles its debt and new borrowing will determine if it gets out of its current economic troubles. Abuja is already spending more than it wants to repay its old debt. Nigeria’s debt-service-to-revenue ratio reached around 66% in 2017, although it fell down to 45% as of early December. Even finance minister Kemi Adeosun admits this is still too high, and it certainly does not give much room for expenditure on infrastructure. The International Monetary Fund (IMF), ever the friendly chorus, says much the same thing.

But the real telling fact, however, is how much this administration has been relying on foreign debt.Nigeria reached an unprecedented high of $15.4bn in debt in the third quarter of 2017. To put this into context, foreign exchange (FX) reserves also reached $37.9bn, meaning external debt accounted for more than 40% of dollar reserves.

In August 2017, Adeosun directly displayed a preference for external debt over local debt by refinancing $3bn worth of naira debt with dollars instead, citing lowering the cost of servicing. As a headline, this does appear to make sense. But it does not take into account anything but the best-case scenario. This is not the full picture and ignores realistic concerns about likely threats.

By relying on foreign debt, the administration risks an adverse move in FX, ballooning the cost of servicing and negatively impacting affordability. Our friendly chorus at the IMF released a report in April last year stating that it considered the naira overvalued by 10-20%; this means there is still a risk of significant depreciation, particularly if there are any shocks to the dollar reserves. This would then hit the central bank’s ability to defend the value of the naira. Maintaining the current external debt-servicing burden is also heavily dependent on dollar revenue, which is still a proxy play on oil.

Now, oil revenue in Nigeria has in fact been on a positive trajectory, with output averaging 2.2m barrels per day (bpd) in 2017. The oil price improved significantly last year, from around $52 to $64. And the Organisation of Petroleum Exporting Countries (OPEC) extended Nigeria’s exemption from its fixed output figure of 1.8m bpd, with the next group review due in June.

But the risks to this are oil prices falling and OPEC deciding to restrict Nigeria’s output in June. There could also be a resurgence in militant attacks in the Niger Delta, which would hit production again. Nigeria is largely in the hands of the global markets concerning the oil price. And with so much of government revenue going towards servicing, there is not much room to make the appropriate investments in infrastructure to withstand any shocks and to diversify away from oil.

The government does not seem to be paying attention to these risks. The debt management office made it explicitly clear when presenting the 2018 budget. The strategy is to rely even more on foreign debt, rather than local debt, with plans to increase external debt to 40% by the end of 2019. Does this not run contrary to the call for Nigerian citizens to focus on domestic resilience? Does this not fly in the face of the Made in Nigeria spirit?

There is also a wider moral question. With debt servicing accounting for nearly half of revenue and plans to borrow even more, isn’t the administration risking piling debt on a generation that may not be able to afford the burden? Is this a fair gamble to make?

One hopes that the administration will make good on its promise to spend the money appropriately. Infrastructure projects require additional financing, not to mention their complexity and long-term nature, before any real tangible benefits are felt.

Debt is debt

The promise of moving Nigeria’s reliance away from oil and into non-oil revenue has long been unfulfilled. And if the administration still relies on citing the oil price to benchmark its budget and using oil as the main tool for being able to afford this debt pile-on, then it does not instil much confidence.

There has been some progress on government revenue with the introduction of the Voluntary Assets and Income Declaration Scheme and its use in widening the tax base by softly encouraging Nigerians to declare taxable income without threat of criminal charges. But in an economy that has only recently recovered from a recession and saw a fuel scarcity epidemic over December, can we really expect the average Nigerian to have enough confidence in the system to voluntarily declare any additional income they are making? Is it even fair to increase the tax burden in such an environment? And with an election cycle around the corner, are what we prudishly called ‘vested interests’ truly aligned with the progressive Nigeria project?

In my opinion, the bottom line is that debt is debt. Tapping the markets for debt is cheap now, so the temptation and the rationale make sense. It makes sense to get it at this price while the government can, along with every other emerging market. The problem is what will the administration do if, and when, the tide turns? Is it even preparing for such an eventuality? Are the risks being adequately calculated and hedged for? Or are we risking finding ourselves exposed again in a few years, and this time without nearly as much available in our sovereign wealth fund or external crude account?

Also, are we not again putting ourselves in the hands of global markets and “foreigners”, and not spending enough time focusing on the domestic inefficiencies and encouraging banks to actually loan to small businesses to stimulate organic domestic growth? The Made In Nigeria philosophy could work, but if the administration is not serious about it itself, it cannot expect citizens to have confidence in it either. That is where the true failure lies.

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